Investing for retirement is one of the most important, but relatively painless, things you can do in your early work years, that will make your future much brighter. Here are some time tested easy steps for you to help you get started.
1-Figure out how much income you need in retirement. So, how much do you need each year now? You can look up cost of living in most cities, but don’t forget to boost your healthcare costs estimate. If you want to include traveling, because you will finally have time, you will need to add that into the cost of living estimate. You also might want to figure in factors such as your expected expenses, longevity expectancy, and inflation. Inflation is so often ignored, but it will really shrink how far your future dollars will go. Spread out over time, you can count on about 3% average annual inflation.
2-Now calculate how much money to save for retirement. Wait, don’t panic, lets break down the steps. Add up your sources of income in retirement, like pension, social security, investments etc.If you want $50,000 in annual retirement and you expect $1500 a month from social security, or $18,000, you will need to fill the additional $32,000 through investments. Now take that gap income amount and multiply it by 25. In this case $800,000. That is your savings goal. Now you know why investing early can make such a big difference.
3–Split your savings goal by the time you have to invest. Keep in mind, if you are young, interest you earn on your investments will offset inflation and our account balance will grow more quickly over time, with interest on interest. Research before you invest and only invest in companies you have great confidence in. This is where Investmentsstore.com can help you find an advisor who can get you started.
4-Be ready before you invest for retirement. Keep in mind, if you have high credit card balances with high interest rates, it wont make sense to put all your money into retirement savings that yield lower returns.
- Pay down or pay off your debt. Living beyond your means can make retirement painful. The first step is to watch your spending and pay down or off your credit debt.
- Build an emergency fund. If you have an unexpected expense such as medical emergency, big car or home repair, or family emergency, savings can prevent escalating into a financial emergency. You can still put the money into an account, but make sure you have access short term if needed.
- Only invest money for retirement if you can live without it for at least five years. You don’t want to have to liquidate the investments in the middle of a downturn if you can avoid it.
- Share your plan. Make sure if you have a partner or spouse, that you discuss your plans and goals for retirement. The plan will only work if both of you are committed to the same goals.
5-Get Familiar with the different types of retirement accounts. It is not enough to know to keep fees low and allocation spread out. You need to know types of retirement accounts exist and how to choose the right ones for you.
- 401(k) accounts. A 401(k) account is provided by many employers to their employees, and are often managed by a big financial company such as Fidelity Investments. The nice thing about contributing out of your paycheck is that the 401(k) contribution is pretax, so it reduces your taxable income for the year and won’t be taxed until you withdraw it in retirement. There is also a Roth 401(k). when you contribute to a Roth 401(k) you are using post tax money so your taxable annual income amount is not reduced, but when you withdraw the money in retirement you can do so TAX FREE. You can make the most out of your 401(k) plan by PARTICIPATING, matching your employer’s contributions, keep stocks in your plan varied with 10% maximum of your net worth in company stock, and don’t cash out your 401(k) when you change jobs and don’t borrow from your 401(k) unless in a true emergency. That’s why you need that emergency savings before you invest for retirement.
- IRA (Individual Retirement Account). You can open your own IRS account and make your own contributions, though there are annual caps on how much you can contribute, depending on your age. There are many types of IRAs which fall within three groups: Traditional, or deductible IRA’s, Nondeductible IRA’s which are taxed as you contribute, but only on the earnings in your retirement, and Roth IRA’s in which contributions are post tax, but not taxed upon withdrawal in your retirement.
- Annuities. An annuity can offer an endless income stream similar to a pension. Shop around to see what income you might expect compared to the cost. Don’t be afraid to negotiate for a better rate.
- Deferred Annuities start to pay at a future point. In exchange for waiting, you get bigger payouts.
Investmentsstore.com wants to connect you to an experienced advisor who can walk you through your steps to better retirement. Learn as much as you can through research – we love to answer questions from educated investors – then come see us at investmentsstore.com to find the right investment counselor for your needs.